Market Commentary and Fund Performance

Tad Fujimura of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, shares his insights on the market and Fund performance.

September 2020
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Fund Performance Review

In August, the Japanese stock market rose sharply amid bullish sentiment fueled by a slowdown in the pace of COVID-19 infections and by news of the development of a vaccine, despite continued bad news in terms of economic statistics and U.S.–China relations. Statements by Federal Reserve officials, including that the U.S. would maintain its stance on monetary easing, also bolstered rising share prices.

Cyclicals and financials, which had been struggling, made significant gains due to the market’s sense that they were undervalued and expectations for an end to the pandemic. As a result, the Tokyo Stock Price Index (TOPIX) rose 7.85% in August. The Russell/Nomura Small Cap™ Index, the benchmark for the Fund, also experienced significant growth, increasing by 6.95% over the same period. The Fund’s performance increased by 4.28% (HJSIX), making significant gains but falling below its benchmark. We believe the primary reasons for this discrepancy are profit taking from the stocks that had previously risen, and also the Fund was unable to make up the difference due to significant gains in cyclicals and financials, which have a low weight in the Fund’s portfolio.

Among the best performers this month was Musashi Seimitsu Industry Co., a producer of gears and other automotive parts, which saw its share price rise, likely due to bullish sentiment about the firm’s steady stream of future orders, mainly for electric vehicle parts. Internet-based life insurance provider LIFENET Insurance Co. also positively contributed to performance. It benefited from a rapid increase in subscription numbers due to COVID-19 and the impact of an active advertising campaign, likely triggering its share price gains. The share price for home electronics retailer Nojima Corporation is on the rise, likely due to the robust sales of primarily digital home electronics and to its announcement of higher year-end profit projections resulting from the impact of making Suruga Bank Ltd., an equity-method affiliate company. Meanwhile, one of the most negative performers to the Fund’s performance this month was integrated construction-related waste management provider Takeei Corporation, which lost value in its share price due to concerns over a dilution of earnings per share after it announced a public offering of new shares. The share price of Towa Corporation, which manufactures production equipment for semiconductor post-processing steps including sealing and cutting, also fell likely in response to its previous rise due to expected demand for 5G-oriented semiconductors. 

Outlook for September 2020

Global stock markets have recovered significantly from their sharp drop in March on concerns about the pandemic. The Japanese stock market has followed suit, albeit more slowly than U.S. and Chinese markets, with slight corrections in June and July. The reasons for this recovery are the reassurance provided by adequate financing and monetary easing policies. We expect these policies to continue for the foreseeable future because the real economy will take time to improve. Nevertheless, we believe that risk is on the rise, as share prices are becoming less undervalued, and the current upward trend is solely based on expectations. At the same time, while there have been slight improvements, there is still a significant gap in share price performance, and many stocks still have considerable upside potential. For our investment strategy, we intend to consider investments in stocks that have become more undervalued, and we will not be deterred by short-term share price fluctuations. We also aim to continue investing in companies that the market has yet to evaluate properly but that have increased growth potential amid major structural changes in their industries.